M A I N   N E W S

S&P cuts India’s economic outlook
* Global credit rating agency gives India lowest investment grade * Govt says no need to panic
Sanjeev Sharma/TNS

New Delhi, April 25
Global agency Standard and Poor’s (S&P) today lowered India's rating outlook to negative and warned of a downgrade in two years. The silver lining is that this warning could provide the desperate trigger for the government to push through much-needed reforms for the economy.

India’s rating of BBB, which is the lowest investment grade rating, is at risk now if action is not taken to address the issues of fiscal deficit, cutting subsidies and boosting growth through reforms.

“The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish or progress on fiscal reforms remains slow in a weakened political setting", said S&P’s credit analyst Takahira Ogawa in a statement.

The agency said high fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. Significantly, the current political impasse in the country, where reforms are not moving and legislations are slow, have been taken into account by the ratings agency. They have also factored in the difficulty of moving fast on tough decisions with just two years for the General Election in 2014.

Since the beginning of India’s liberalisation, pushing the reforms process has not been a smooth sailing. Investors now understand that reforms happen in a up and down manner and sometimes take their own time. Many seemingly tough decisions have been taken only when there was an urgent need. This ratings action could act as a trigger for the government to swing into action without which a downgrade a couple of years down the line is apparent.

“We expect only modest progress in fiscal and public sector reforms, given the political cycle — with the next elections to be held by May 2014 — and the current political gridlock. Such reforms include reducing fuel and fertiliser subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors”, S&P said in the ratings review.

The lowering of outlook could impact the already weakening rupee, affect the investment for foreign investors, both capital and FDI flows, raise borrowings costs for Indian companies in the international markets and dent India’s reputation as a growth story and investment destination. S&P simultaneously also revised its outlook on Indian companies and banks in line with the sovereign ratings. The ratings action led to the stock markets selling off but recovered later in the day.

The negative outlook, the rating agency said, signals likelihood of downgrade of India's sovereign within next 24 months. "A downgrade is likely if the country's economic growth prospects is dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow", it said.

S&P has not bought Finance Ministry’s estimates on GDP growth and fiscal deficit. It has pegged growth much lower at 5.3% for 2012-13 as compared to government’s 7% forecast.

Finance Minister Pranab Mukherjee termed the ratings cut as a “timely warning”, but added there is no need to panic as the government is committed to economic reforms.

Mukherjee maintained that 7% growth will be achieved and fiscal deficit target of 5.1% will be met. “So economic reforms will be on track. The reform process and necessary administrative decisions required to ensure that fiscal deficit is retained at projected level will be taken”, he said.

Edelweiss Research said in a research note that importantly, at this stage it is just an outlook change and not a ratings downgrade. To that extent, it is more of a warning of increasing vulnerabilities of the country.

According to Edelweiss, nonetheless, the action can impact the Rupee in the near term, already under pressure and perhaps raise external borrowing costs for some corporates. The silver lining could be that this action could exert pressure on the government to act on fiscal front (possibly by raising the diesel prices etc) as well as on policy front.

The likely fallout

• It could impact the already weakening rupee
• Affect investment for foreign investors
• Raise borrowings costs for Indian companies in the international markets
• Dent India’s reputation as a growth and investment destination

About S&P

Standard & Poor's (S&P) is a US-based financial services company known for its stock-market indices. It’s one of the Big Three credit-rating agencies, which include Moody's Investor Service and Fitch Ratings